Michael Kaminski, Funder's Choice LLC

The best mortgage advice has nothing to do with interest rates or loan-to-value ratios. The magic words are: Don't ever miss a mortgage payment!

Laws regarding mortgage default and foreclosure differ from state to state, and mortgage lenders and servicing companies vary in the way they approach delinquent borrowers. The big mortgage gatekeepers, such as Freddie Mac, FHA, and the VA, have changed their approach to managing delinquencies in the last ten years. They've realized that it's more cost-effective to help a borrower to stay in his home than to pursue foreclosure and then deal with owning, managing, and selling the resulting real estate. Consequently, there are probably a hundred different scenarios that can play out as a mortgage delinquency progresses, and at least that many ways a borrower can deal with his default problems. We address a few of the possibilities and options below.

Mortgage notes usually carry a grace period of 15 days, but some are as short as 10 days. Many people "play the float." That means they delay through most of the grace period before making payment. No one, including the lender, thinks very much about it. On day 16, however, a mortgage late fee is assessed. At this point, there are no ramifications beyond that late fee and maybe a "friendly reminder" call from the lender's customer service department. The late payment probably won't even show up on the borrower's credit report.

The late fee is usually a percentage of the principal balance. Three percent is typical. On a $300,000 mortgage, this is roughly a $100 penalty. But if the next couple of payments are also missed, the cost of bringing the mortgage current grows pretty fast.

On day 30, the borrower is in default and things quickly turn serious.

The situation turns serious

Past day 30, some lenders will allow a borrower to make a partial payment of the past due amount; others will insist that everything be brought current. Lenders may even return a check if it does not cover both the current and the past due payments, as well as the late charges.

By day 45 the phone calls from mortgage collectors will be coming pretty regularly. Most states have rules regarding collection activities and telephone calls, including their frequency, content (no threats are permitted), and timing (early morning and late night calls are generally off limits,). Still, the calls, within legal boundaries, will be unremitting, and the tone can vary from "gee, we just want to help" to aggressively demanding.

About 60 to 90 days after the initial missed payment, the lender will send a notice of default, usually by certified mail, giving the borrower a finite period in which to cure the situation by paying all past due amounts. By now, collection costs are probably being added to the late fees.

Once that remedial period passes, the collection department will refer the loan to the lender's legal department, which will, after another period of time, send the documents to a local attorney to begin foreclosure proceedings. By this time, serious legal fees are accruing.

A foreclosure is a legal event, and there are benchmarks that must be met. Once the case is turned over to attorneys, the impending foreclosure must be advertised, usually in both the local papers and the largest and closest metropolitan daily. The entire process can take a very long time from initial default to the actual public auction of the property. If a member of the military is an owner of the property, there are additional safeguards required by federal, and in some cases state, laws.

From the beginning of the process, however, the meter is running. The longer the foreclosure takes, the greater the debt that accrues and the larger the homeowner's liability, something that will become critical down the road.

In most states, the law gives the homeowner every opportunity to stop the process leading to foreclosure, right up to the minute the auctioneer's gavel comes down and sometimes even beyond. In some states, there's a period after the foreclosure during which the homeowner can redeem the property (right of redemption).

It is important to know this, because less-than-ethical lenders and servicing companies will tell borrowers that, once default has occurred, the acceleration clause of the mortgage is invoked and the entire mortgage balance is due and payable -- in other words, if a borrower misses his $1,200 payment for several months and now owes $3,600 plus late fees and legal expenses, he must come up with the entire $150,000 mortgage balance in order to stop the foreclosure. This may be technically true, but it is rarely invoked in practice.

The actual foreclosure auction might be conducted in the front yard of the subject property or "by public outcry" on the front steps of the county courthouse. Either way, it is pretty frightening for the homeowner involved.

Michael Kaminski is an accomplished attorney, Realtor and financier, with experience in real estate finance, real estate law, real estate securities and real estate development and sales.